Legislation effective in January 2005 authorizes our office to develop a risk assessment process. In May 2007 we issued our first assessment of high-risk issues facing the State.
We have added three issues to our high-risk list:
The State continues to face the five significant high-risk issues previously reported:
The following three state agencies meet our criteria for high risk:
Providing the leadership, programs, and services the State needs is a complex business; the use of significant resources and the provision of critical services to the people of California are accompanied by risks. Systematically identifying and addressing high-risk issues can contribute to enhanced efficiency and effectiveness by focusing the State's resources on improving service delivery. Legislation effective in January 2005 authorizes the Bureau of State Audits (Bureau) to develop such a risk assessment process. We issued our initial assessment of high-risk issues the State and state agencies face in May 2007 (Report 2006-601).
Chapter 1 of this current report outlines the three issues we are adding to the high-risk list: the State's budget condition, the administration of federal funding received under the American Recovery and Reinvestment Act of 2009 (Recovery Act), and the production and delivery of electricity. In Chapter 2 we provide an in-depth review of select issues of continuing high risk: maintaining and improving infrastructure, management of human resources, and other postemployment benefits (OPEB) of retiring state employees. In Chapter 3 we update our analysis of the remaining high-risk issues and departments facing risk and challenges: emergency preparedness, information technology governance, the California Department of Corrections and Rehabilitation (Corrections), the Department of Health Care Services (Health Care Services), and the California Department of Public Health (Public Health).
The first new issue the Bureau is adding to the high-risk list is the State's budget condition; the Bureau issued a report in February 2009 (Report 2008-603) that focused on this risk issue. In analyzing information on budget deficits and surpluses from the last 20 years, we found that all measures pointed to the same conclusion—the State has experienced ongoing deficits that greatly outweigh any surpluses. Moreover, nearly half of the amounts related to the budget solutions implemented to resolve the shortfalls have only pushed the problem into the future. A number of factors have made it difficult for decision makers to correct the long-standing budget imbalance. Examples of these factors include the two-thirds majority vote needed for lawmakers to raise state tax revenues, disproportionate increases in populations dependent on some of the State's most significant programs, voter-approved programs without revenue sources, and the State's dependence on personal income taxes for revenue.
The administration of federal funding related to the Recovery Act is our second new high-risk issue. California expects to receive $85.4 billion under the Recovery Act during fiscal years 2008-09 and 2009-10. The Recovery Act's intent is to stimulate the economy at the state and local level, as well as stabilize state and local governmental budgets. Significant requirements and penalties for noncompliance will be placed on entities that receive Recovery Act funds. Prior audit reports we and the Department of Finance have issued identify concerns related to certain state agencies' internal controls over their administration of federal programs. These control concerns, the large amounts of Recovery Act funds California expects to receive, and the requirements the Recovery Act imposes on recipients makes this a high-risk issue, as we reported in April 2009 (Report 2009-611).
Because California's electricity sector faces multiple challenges and problems related to energy production and consumption, the production and delivery of electricity is the third new issue the Bureau is adding to the high-risk list. This risk issue is described in a report the Bureau issued June 2009 (Report 2008-602). The reliable supply of electricity provides a critical foundation both for California's economy and its citizens' standard of living. In 2000 and 2001, California endured an energy crisis; the State has since worked to deal with the challenges of ensuring that sufficient capacity exists to generate the volume of electricity needed. For example, according to the California Independent System Operator, improvements to California's key transmission lines are complete. In addition, the California Energy Commission reports that it has approved 69 new power plants during the last decade. However, new power plant construction may be somewhat offset by the need to replace environmentally harmful and aging power plants in the near future and by the difficulties the State faces in doing so. Since the energy crisis, California has adopted targets to increase the use of renewable sources of electricity. However, the State is at risk of failing to meet these targets because various obstacles are preventing the construction of the infrastructure needed to generate and transmit electricity from such renewable sources as wind and solar. Finally, adding to the issues described above is a proposal currently before the Legislature to reorganize certain energy-related entities and create a new state Department of Energy, which presents additional uncertainties related to the State's ability to formulate strategic energy policies.
Maintaining and improving infrastructure remains on our high-risk list and is the first continuing issue we reviewed. The voters partially funded the State's infrastructure needs when they approved $42.7 billion in bond funds in November 2006. The governor has established a framework for infrastructure bond accountability, which the Bureau's February 2009 report (Report 2008-604) concludes that, if followed, the established controls should provide reasonable assurance that infrastructure bond proceeds are used as intended. Our review found that administering agencies had committed about $25 billion of the bond funds to specific infrastructure projects, and those agencies had spent about $7.3 billion. Infrastructure needs are less than 10 percent funded, and it is too early in the process to determine if established accountability tools are being used wisely.
The State's human resources management remains on the high-risk list and is the second continuing risk that we reviewed. The State is currently facing and will continue to face the retirement of a significant number of today's workers in both leadership and rank-and-file positions, as we reported in March 2009 (Report 2008-605). During the 20-year period between 1988 and 2008, the number of full-time permanent state employees has increased from 136,700 to 200,000, and the proportion of workers in older age groups has grown significantly. Since 2007 the Department of Personnel Administration (Personnel Administration) has focused much of its efforts on workforce planning—it considers succession planning a subset of workforce planning—and on modernizing and streamlining the State's human resource system to recruit, develop, and maintain a well-qualified, high-performing workforce. Personnel Administration hired a statewide workforce planning manager to educate agencies about the urgency of workforce planning and how to develop such plans; it is also streamlining the State's hiring process by using online testing. Unlike other states, California does not require departments to develop workforce and succession plans. Agencies we interviewed point to the State's lengthy hiring process and salaries lower than the private sector as barriers to replacing retiring employees.
The risks posed by paying and accounting for OPEB of retiring state employees remains on our high-risk list as we reported in April 2009 (Report 2008-607); OPEB is the third continuing issue we reviewed. Medical and dental benefits are the primary components of OPEB. The most recent actuarial study shows the State's total estimated OPEB liability is $48 billion. In addition, new accounting rules require the State to calculate the amount that it would need to pay each year to fully fund this liability—the annual required contribution—and record a liability to the extent that the contribution is not paid. Because it uses the pay-as-you-go method of funding its retirees' OPEB, the State addresses only the current year's costs and does not set aside funds to cover any future costs. For example, in fiscal year 2007-08, the State paid only $1.25 billion of the $3.59 billion annual required contribution for OPEB costs and consequently recorded an OPEB liability of $2.34 billion in its financial statements. The State's OPEB liability for fiscal year 2008-09 is projected to increase to $4.71 billion. A key risk is that the rapidly rising OPEB liability will affect the State's credit rating and its ability to borrow funds to finance its operations at the lowest available interest rates.
Emergency preparedness is an issue we originally identified as high risk, and it remains on our list. The State has taken several actions, such as enhancing preparedness in the medical care sector by purchasing medical equipment including three 200-bed mobile field hospitals, issuing guidance to assist the medical sector in planning for emergency responses, and helping to inform and prepare the public for emergencies. The State also formed the California Emergency Management Agency to help streamline emergency preparedness. However, its preparedness for emergencies is not complete. For example, a report issued in 2009 stated that California's public health workforce and laboratory capacity remain in need of significant attention and that a strong state laboratory is critical to the State's ability to identify and quickly respond to disease-based emergencies.
Information technology governance and oversight is another original high-risk issue needing further review. The State continues to need and develop large information systems, but it lacks a mature governance structure and strategic plan. The Legislature recently allowed to take effect the governor's proposal to reorganize many of the state information technology-related departments and functions under the Office of the State Chief Information Officer (Information Office). That reorganization is in its infancy. The Information Office's strategic planning process is also new. The office published two of three volumes of its strategic plan beginning in January 2009. As of mid-May 2009, the Information Office was drafting and reviewing the third volume, but it is too early to tell what results the plan will yield. Meanwhile, the State is moving forward with several large information technology projects ranging in cost from $178.6 million to $1.6 billion. These large projects present risk to the State, including developing a product that meets the State's needs and managing the cost of each project. At this time, information technology governance will remain on our high-risk list.
Corrections is one of the departments we originally identified as facing risks and challenges that have not subsided since our inaugural high-risk report. The department reports that as of March 31, 2009, its adult institutions are at more than 192 percent of the system's design capacity of one inmate per cell. Corrections' medical health care system is still under the receivership of the U.S. District Court for the Northern District of California, and the court recently rejected Corrections' motion to have the receivership removed. In fact, a three-judge court formed under federal law has opined that overcrowding is a primary cause of Corrections' unconstitutional system conditions, such as medical care, and has issued a tentative ruling directing Corrections to release inmates to reduce prison overcrowding. Additionally, Corrections still struggles to maintain consistent leadership: the governor appointed the fourth secretary for this department in the past three years, and for high-level headquarters positions and wardens, vacancy rates or positions filled with staff in an acting capacity remain at over 30 percent. Finally, Corrections stopped measuring progress against its existing strategic plan in fall 2008, when, under the direction of the new secretary, it began developing a new strategic plan. Corrections intends to complete this plan by summer 2009.
The final risks we analyze relate to the two departments that emerged after the splitting up of the Department of Health Services (Health Services): Health Care Services and Public Health. As we noted in our inaugural high-risk report, as new entities, Health Care Services and Public Health face challenges to ensure that they provide effective services in addition to meeting the Legislature's expectations for increased program accountability. Although each department has completed a strategic plan and began implementing these plans in 2008, more time is needed to prove these plans effective. In addition, for fiscal year 2007-08, the budgeted resources for the two departments were greater than Health Services' fiscal year 2006-07 budget; however, it is nearly impossible to determine which budget adjustments would have occurred under Health Services had the split not taken place.
We will continue to monitor the risks we have identified in this report and the efforts state agencies make to address them. To successfully mitigate these risks, we believe the State needs to take certain actions. For example, a responsible person, group, or entity needs to coordinate the activities necessary to address broad risk issues involving multiple agencies. Those responsible parties and the specific state agencies we have designated as high risk must demonstrate a commitment to address the identified risks and to commit sufficient resources to resolve them. As part of this effort, those designated with this responsibility should develop detailed and definitive action plans along with a process for independently monitoring and measuring the effectiveness of the steps taken. In addition to monitoring these actions, we plan to periodically evaluate the quality and effectiveness of the State's mitigating efforts by conducting audits. When state actions result in significant progress toward resolving or mitigating these risks, we will remove the high-risk designation based on our professional judgment.